Precautionary money demand in a cash-in-advance economy with capital

We use a stochastic cash-in-advance model with capital to analyze the behavior of economic agents with respect to a precautionary money demand. We show that the conditions under which agents demand more money than they actually spend in the shopping session differ according to the agent's utility function parameter. When agents are highly risk averse, the precautionary money demand may arise under low technology shocks. The circumstances under which a nonbinding cash-in-advance constraint may appear are reversed in a model without capital. The reason of observed differences is the possibility of converting a fraction of output into capital, not only into real balances. © Springer Science + Business Media, Inc. 2005.